A war of words has broken out between the Treasury Department and the EU over proposed EU financial services regulations. The first salvo in this dispute occurred earlier this week, when, as reported in the Guardian, American banks were excluded from the sovereign bond market, which means new issues (they obviously cannot be prohibited from making secondary trades in an OTC market). This is seen as punishment for their role in helping various states evade EU rules on deficit spending via using currency swaps. But as the Guardian noted, the EU increasingly has broader concerns about the appropriateness of an Anglo Saxon finance model that looks predatory:

“Governments do not have the confidence that the excessive risk-taking culture of the big Wall Street banks has changed and they still cannot be trusted to put the stability of the financial system before profit,” said Arlene McCarthy, vice chair of the European parliament’s economic and monetary affairs committee. “It is no surprise therefore that governments are reluctant to do business with banks that have failed to learn the lesson of the crisis. The banks need to acknowledge the mistakes that were made and behave in an ethical way to regain the trust and confidence of governments.”

Yves here. Now despite the howls from the US (more on that shortly) this is not as unreasonable as it sounds to people conditioned to think that regulators have no business…..regulating. For instance, it standard operating procedure that when a defense contractor has violated certain rules, that it will be frozen out of the contracting process for a while, the length of exclusion depending on the seriousness of the misconduct. Similarly, foreign regulators have taken much more serious actions against US miscreants in the past (Citi was forced to shut down its private banking operations in Japan, which had a major focus of their business in that country, as a result of serious regulatory violations and resulting termination of licenses. That’s not a bug, that goes with the terrain in any regulated businesses). These firms operate with the sufferance of the state, and the state reserves the right to intervene if it does not like the behavior that results. Now there is an implicit obligation on the part of the state not to intervene capriciously, otherwise no one would take up these franchises to begin with.

The other reason this action is not as unreasonable as it is being seen in the US is that the EU operates on a principles based system, while our legal system is rules based. We have a peculiar notion here that if a business manages to weave its way through a legal thicket, or better yet, tear down rules that constrain behavior, then all is fair, no matter how fraudulent or predatory the behavior is by any common sense standard. That sort of posture does not go over very well in a principles based regime.

So now go back and re-read the excerpt above. The right response, from the EU perspective, is for the US firms to roll over and show their bellies, which means apologize in public and private, and make at least vague, better yet specific, promises not to do certain bad things again.

I would expect the U.S. bank lobby to pressure the Obama Administration into developing demarche communiqués at the State and Commerce Departments condemning this as a protectionist move. This is the type of work that State and Commerce does regularly on behalf of companies like Chiquita Brands International. The bank lobby is much more powerful. So, one should expect this to rise to an Ambassador-level talking point.

Yves here. What he did not anticipate was how quickly temperatures have risen. As this and other blogs noted, the EU is also considering restricting the reach of private equity funds, both their ability to make investments in Europe, and the ability of EU investors to put money in US funds.

The next step was Geithner issuing a letter contend that proposed EU regulations of that suggested that these proposals were discriminatory. While on paper that argument might appear sensible, it deliberately obscures a bigger reality: the way these firms operate, particularly the PE firm practice of using leverage, and the consequences of leverage (if you get it wrong, firms go bankrupt more so that if they had not borrowed, leading to unemployment) runs afoul of other government policies. This is a matter of sovereignity conflicting with an ideology that more open markets are ever and always better. You cannot have both in absolute form, and the EU is deciding to trade off one versus the other in a manner different than the US does.

A spokesman for Michel Barnier, the new EU internal market commissioner who is responsible for financial services regulation and to whom Mr Geithner addressed his concerns, said that the EU decision to act on hedge funds was in line with a G20 decision to reinforce transparency in the financial system.

He added that the new commissioner wanted to “work closely” with the US, to ensure “robust standards” in financial services.

Yves again. While this is all very entertaining, the focus on the tit-for-tat misses the elephant in the room: what the hell is Geithner doing lobbying for hedge funds and PE funds?

The Volcker rule makes clear that the US does not regard these as functions integral to the operation of a healthy financial system and deserving of backstopping. The vast majority of PE and hedge funds, in terms of their staffing, are small businesses. Since when do small businesses have the Treasury secretary going to bat for them in a major international spat (this is the lead story in the Financial Times right now, lest you have any doubt).

Follow the money. Its “change” and populist pre election branding to the contrary, Obama raised more money from the financial services industry than any previous Presidential candidate. And the procurer-in-chief, Rahm Emanuel, concentrated his impressive fund-raising efforts on hedge funds and private equity firms (see here, here, and here). They expect a handsome return on investment, and it sure looks like they are getting it.

40 comments

You (and Ed Harrison) nailed it. This will continue to escalate because Geithner is the PE lap dog–among other things–in this administration. I pray the EU regulators have the courage of their convictions to stay true to their objectives and not bow to absurd US protestations of discrimination, etc. If the financial meltdown that we’ve exported around the globe is going to change we need regulation with teeth. Let’s hope the long reach and deep pockets pulling the strings for TurboTaxTimmy fail to buy influence over our friends across the pond.

Quite the contrary. It’s the military industrial complex that needs the banks because nations at war need access to money to pay for it.

The predatory actions of the banks – and the socialization of their losses – hampers the government’s ability to serve its people. Banks were smaller and less profitable in the 1960s and that saw an expansion of the welfare state (also an expansion of debt thanks primarily to the Vietnam war).

rules based = rule of law. The individual or the business knows ahead of time what is against the law. If he doesn’t break the law, he isn’t punished.

principles based = rule of man. The regulator can punish anyone he pleases at any time for any reason, if they make him mad. No one is ever safe. There is no protection for the individual against arbitrary, unjust officials, who are petty despots.

Please your brain could not be more washed. Here in the land of the free a person robs a 7/11 and gets hard time. A banker, on the other hand, steals billions from the tax payer drops a few millions to the local congressman and president and what does he get? well of course millions more in bonuses. Equal justice under the law my as^&^*%*

You make an inaccurate charge, that regulators under a principles based system can be arbitrary. Principles based does not mean capricious or all powerful, as you incorrectly suggest, it means they consider broad objectives, not narrow rules which can be gamed or become outmoded.

I’ve run a business under both types of regimes, and did not find a principles based system to be arbitrary or unfair, nor did other local businesspeople.

I too lived and operated businesses in the USA as well as the EU. The US is indeed great if you’re a corrupt business, like a bank, insurance company, attorney firm, etc. But if you’re a human being, the EU is the better place to be.

This remark is, as said before me, completely out of whack.
I only want to add that the EU system cannot be simply labelled a “system of principles”. There are two kind of systems: that of the Northern countries and that of the latin countries. They are quite different. The “Code Napoléon” is a written code. If you do things that are not strictly forbidden by some code, it is OK, even if on the border of common sense. This has led the tax people in France to invent something quite contrary to the Napoleonic principles l”abus de droit”, literally abuse of the law. In other words, if the tax people think that you have been too clever by half, they will redress you, claiming that you used the law specifically to avoid paying taxes that, otherwise you would have had to pay.

When I first read this, I immediately thought “Protectionism.” It reminds me of the quality concerns that kept all American goods out of Japan for decades. True, a lot of it was knowing junk, but a lot of it was the domestic market.

Part of battening down for hard times is bringing the work home. Companies bring in the components from the subcontractors, households start cooking supper instead of restaurants, offices fire the contractors and double up on work, etc. Europe may be looking past the recovery uptalk and be arranging for a meaner, poorer future.

“Why is Geithner lobbying the EU on behalf of hedge and private equity funds?”

That’s a rhetorical question, right?

If you look at how dodgy European banks have been, I don’t see the “principles” based regulatory approach being more effective than the rules based one. Is this punitive and protectionist? Probably. But this is to be expected with the dearth of international leadership emanating out of Washington. We are left with the EU trying to protect their own, and Geithner trying to protect his own. Neither is actually fixing what is broken in their financial systems.

This is not true. While there often are protectionist instincts at work here certainly are not.
The banning of WS banks from debt emission of EU countries is perhaps somewhat protectionist. But even that move came from a real feeling, that those banks are not trustable and in the end it was really Goldman, which was involved in the Greek debt hiding and – at least to my knowledge – not the Deutsche Bank or Barclays.

The other thing is the banning of CDS on state debt. This has really nothing at all to do with protectionism. Zero.

Methinks that only Alternative Investment Funds (AIF) and Alternative Investment Fund Managers (AIFM) are concerned by this regulation.
So it is only a certain type of fund that is affected by this regulation which is in draft stage.
My concern is that the fund managers are using the UK as their mouthpiece and agent to block the regulation, where is no legal basis for that? For me this is a illegal intervention in the law-making process of the EU and should be punishable.http://zeropointfield.wordpress.com/2010/03/11/wsj-geithner-warns-eu-on-fund-legislation/

The U.S. decision to effectively shut out EADS from bidding for the Air Force refuelling tanker contract is another perfect excuse for Germany and France stiffen the opposition towards U.S. meddling in EU affairs.

Geithner is about one year late to this party. Had he wanted to influence the EU proposal there was a window to do so before the EU Commission tabled the initial proposal. Geithner may or may not be effective in influencing the EU States in modifying their position, but it is much more difficult, almost impossible, for him to influence the EU Parlliament with its 700+ members. See the total lack of success in influencing the Parliament’s negative position on the SWIFT deal, despite calls from Hillary Clinton to Parlamentarians, etc.

The U.S. has for the past year or so enjoyed mocking EU leaders’ ambition to “discipline capitalism”, etc. Particularly “funny” is the EU’s talent in producing a steady stream of long documents with lofty aims and principles at its many meetings within the numerous decision-making structures. That tedious process is the EU’s way for gradually and slowly forging a momentum for moving forward on issues. Once the machinery is up to speed, it will be difficult to achieve other than marginal modifications. The is what the Americans experienced a few years back with the EU’s new chemicals legislation and what may happen now with the hedge fund legislation.

It seems that Geithner is blind to the fact that the U.S., in the eyes of Europeans, has lost its thought leadership on economic and financial matters.

Since European banks have not been all saints without sins, I would not like to find out that actually Geithner is also lobbying EU on their behalf…Let’s not forget that AIG was bailed out to pay (legally due) a lot of money to European banks which were playing regulatory arbitrage to speculate. Until we see clear rules passed in the EU I would be less sanguine on real differences between rules and principles, EU and US. Lemon banking and Ponzi schemes are on both sides of the Atlantic…

It will be fun when we know the exact details of that story. From what I understand, it was the French Minister of Finance who engaged with the U.S., on behalf of the French banks (Soc Gen?). Not the European banks directly.

In Europe banks and governments are also too interconnected to fail. Governments sell sovereign bonds to banks, then banks ask governments to be saved and governments issue more bonds to save the banks. If you add to this Ponzi scheme some CDS and bring some US banks into the game no doubt that you screw the system up…

As I recall, the French Minister of Finance told Geithner that under French law, AIG must make good on 100% of what it owed Soc Gen. And, Mr. deer-in-the-headlights, low-IQ Geithner boy believed it without even looking up the actual French laws. Turns out French laws do not mention that issue.

“This is a matter of sovereignty conflicting with an ideology that more open markets are ever and always better.”

Free to Choose? Free at last, free at last! Take your pick… the NATION or the MARKET – which will it be? Patriots or capitalists? One and the same you say? Is there a difference?

It couldn’t be plainer could it? Americans awash in the free market utopian anarchy of Rand and Hayek just can’t envision how the MARKET can threaten NATIONAL SOVEREIGNTY. Indeed, the former is presumably a check on the latter – theoretically. But what happens when the former actually sets out to supplant the latter? Starving the beast is the withering of the state [nation] from the other end of the spectrum. Au contraire Mssr Marx!

The decoupling of the nation from the state is related to the decoupling of investment from production in which the WS banks have played a major role. The state is merely the structured investment vehicle, whether prinicple or rules based, whereby the rules are enforced in this free market utopian anarchy – the wholesale looting of the family silver! The NATION be damned!

“The decoupling of the nation from the state is related to the decoupling of investment from production in which the WS banks have played a major role.”

The decoupling of the nation from the state is more related to the decoupling of the people from the electoral process by the wealthy ruling elite, the propaganda machine that facilitates that decoupling, and the scam ‘rule of law’ produced by that corrupt process.

Rand and Hayek and the ‘free market bullshit’ is a thinly veiled decoy used to conceal and camouflage the global ruling elite gangsters and their raping and pillaging despotic corporations.

To the extent that the state is dependent on capital accumulation for revenue – the means with which to enact policy – it is little more than a structured investment vehicle for capital accumulation mediated by the electoral process. In fact, the latter is a fetter on the accumulation process, something to be tolerated because it obfuscates the primary role of the state – capital accumulation. The latter is increasingly the driving wedge between the state and the nation, pitting it against the people.

The ruling elites in this country will quickly dispense with the electoral process when it no longer suits their purposes. To pretend otherwise is the real deception!

Organized violence underlying the electoral process is the only thing that ruling elites understand. Without the former the latter is meaningless. It is so well orchestrated in this country that the oppressed often identify with their oppressors, making the use of organized violence more the exception than the rule. At least this is the perception of most white Americans. But to pretend that it is confined only to them is wishful thinking. Elsewhere, the STATE fears the NATION!

The threat as well as the means/ability to interrupt the process of capital accumulation – production – in an organized fashion is the message that elections should convey. Without the threat of organized violence from below the electoral process is meaningless, more like a public opinion poll with nonbinding results! Witness the current farce…

“Organized violence underlying the electoral process is the only thing that ruling elites understand. Without the former the latter is meaningless. It is so well orchestrated in this country that the oppressed often identify with their oppressors, making the use of organized violence more the exception than the rule. At least this is the perception of most white Americans. But to pretend that it is confined only to them is wishful thinking. Elsewhere, the STATE fears the NATION!”

That’s a great point. And very accurate, indeed. At its very core, the US is a nation built on fear, death, and violence. The violence became malignant after WW2 when businesses discovered that death can be very profitable. Post 9/11, America finally become a police state that not only terrorizes other nations with war or threat of war, but it also terrorizes its own people.

I agree. The electoral process is meaningless. I meant my comment as more a broader brush elaboration of yours. I favor an ACTIVE, ongoing, election boycott as a vote of no confidence in this government. It is a matter of degree and participation in terms of citizen readiness and in terms of the incremental prodding of the ruling elite and their state. At this point in time you will be hard pressed to get those who are working, and making their mortgage payments on time (even those who are upside down), to engage in; “a year long STRIKE – refusal to pay mortgages, rent, and credit cards”.

But many could, and would, participate in a well planned and well organized peaceful election boycott. Yes, the state would escalate, but then the battle would be more joined, and more people would take to the streets and learn first hand about what a repressive government they are really living under. A significant problem is that most all scamericans are living in a fantasy land where they believe they can simply go out and protest on the streets to exercise their civil rights. That is one of the ways the tea baggers were used. They were allowed their protests, the state made a big deal in reporting them, and so the illusion of being able to protest in ‘the greatest, freest, country in all of history’, prevails. Its bullshit!
I can testify to that with hundreds of first hand street experiences.

Here is an e-mail letter I just received from the Answer Coalition. It gives some insight into the present machinations of the state in chilling free speech by open and illegal intimidation by use of the scam ‘rule of law’.

“I am writing to let you know about a serious assault on free speech rights that we believe is intended to hamper and obstruct the mobilization for the March 20 anti-war demonstrations in Washington, D.C., and in Los Angeles and San Francisco.

On Sunday night, March 6, volunteers in Los Angeles were arrested for allegedly putting up three posters announcing the March 20th action. They were charged with felony vandalism and kept in jail on a $20,000 bail for each of them. Thanks to volunteers coming together, we were able to raise bail money and they are now out of jail.

The heavy felony charge and huge $20,000 bail in Los Angeles comes shortly after a nearly identical situation in San Francisco. Two ANSWER organizers were arrested on felony vandalism charges for allegedly putting up a political poster and also each given a $20,000 bail.

In Washington, D.C., the ANSWER Coalition has been hit with another wave of fines for March 20th political posters. These thousands of dollars of new fines are on top of an unprecedented $70,000 fines from the two most recent mobilizations. We are challenging the old and new fines. The posters conformed to lawful regulations—as they always have. No organization, corporate entity or politician has ever been hit with these massive fines.

Just today, we received another $1,300 fines on top of earlier fines.

Anti-war organizations and volunteers are also being hit with heavy fines in Chicago, New York City and elsewhere.

The stakes here are high.

The massive fines and felony arrests with extraordinarily high bail come just before what we believe will be the largest outpouring to date against the war in Afghanistan.

The large corporations, including the biggest war contractors and banks, have billions of dollars to advertise their message of war and profit. Grassroots organizations have always relied on leaflets and posters to build progressive movements for change.

The government and national and local law enforcement agencies are now engaged in a nationally coordinated effort to stamp out the exercise of classic grassroots organizing.

We will never surrender to this campaign that aims to intimidate and bankrupt the progressive movement.

We are fighting back. Most importantly, we are continuing to mobilize.

We ask you to show your support by coming to the March 20 demonstrations and by bringing your friends, families, co-workers and fellow students. We will not be silenced.

You can also support this movement by sending an urgently needed donation today.

We want to thank the Partnership for Civil Justice Fund (PCJF), the public interest legal organization, which has filed a lawsuit on behalf of the ANSWER Coalition and Muslim American Society Freedom that challenges the constitutionality of the D.C. postering regulations. Their tireless pro bono legal effort has resulted in an important victory at the U.S. Court of Appeals, which allows the lawsuit to proceed. The government had tried to stop us from even having our day in court. In California, constitutional rights attorney Carol Sobel has waged a major legal battle against the government’s efforts to target free speech postering activities.

In order to win this fight, we have to both defend our rights in the courts and to show solidarity with activists who are facing repression. And each and every one of us can do our part to help support the mobilization of the people against war and occupation. Basic rights were never a gift from politicians. Important change, including basic free speech rights were the result of the struggle by generation after generation.

Thank you for your support. And please, take action now. Together, we can make the difference.”

I am sure you can see the chilling effect this has on legitimate protest. Fuck Obama’s jackbooted scum bag assholes. Election boycotts as a vote of no confidence in this corrupt government are in order!

The “chilling effect” of which you speak is much more pervasive in scope and not limited to “legitimate protest”. It infects the psyche subconsciously as if there’s an “inner cop” that results in self-censorship and behavior unbecoming of a “free people”.

Laying off one person often results in the other nine working harder so that his/her absence isn’t even missed as output increases. Likewise, speaking up and subsequent dismissal serves to reinforce this “inner cop” among those who remain… see what happened to that troublemaker!

The chilling effect is merely a symptom of the larger creeping authoritarianism or societal totalitarianism that grips this country. Reinforced by the MSM in a religious, nationalistic/patriotic cultural cacophony of SPORT and MUSIC entertainment that works overtime to convince US that CONSUMPTION is FREEDOM. To question authority is treason. The most virulent TOTALITARIANISM would be one in which the people believed they were free! Repression would not be necessary…

I might add… what would have more impact another election or a year long STRIKE – refusal to pay mortgages, rent, and credit cards – with no EVICTIONS/subsequent penalties, etc because the authorities would meet resistance when they tried to prosecute/evict? Back to the 1930s.. sit-down strikes, rent strikes…

Then elect individuals who would enact legislation protecting the strikers – the American people – from retribution. What would the ruling elites’ response then be to such an electoral process? The “rule of law” must prevail… whose law?

I am certain the average brutal American policeman would not give it a second thought shooting a homeowner who missed two payments on his/her mortgage, if the “law” specified that.

Unfortunately, it is my assessment that the American police state is now so well armed and so well staffed with trigger-happy morons, it is now impossible to stage a successful rebellion. That’s why I moved out of the US.

“To the extent that the state is dependent on capital accumulation for revenue – the means with which to enact policy – it is little more than a structured investment vehicle for capital accumulation mediated by the electoral process.”

Capital accumulation has morphed into control accumulation. Control now trumps profit. Control is the new money supply. The money base has been destroyed in terms of trust with all of the cheap credit bubbles and counterfeit derivative products intentionally pumped into it.

Witness the vanilla greed folks daily whining about and longing for the good old days of ‘fair regulation’. They too are living in the old fantasy land of responsive government and are constantly wasting their valuable time and resources proffering endless remedial suggestions that are destined for the shit cans before they are created. They do not yet recognize the seriousness of the societal sea change we are experiencing. We are headed for a very brutal, two tier, ruler and ruled world. Despite their fantasies they will be in the ruled portion of it.